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January 22, 2018

Fact Check: Debunking the Top Claims in Support of SFERS’ Divestment Proposal

On Wednesday, the San Francisco Employees’ Retirement System (SFERS) is holding a special meeting where they are expected to finally vote on whether or not to divest the city’s pension fund from the Carbon 200 within 180 days. While the Retirement Board staff and its economic consultants have both recommended against fossil fuel divestment and an independent analysis showed it could cost SFERS $201 billion, activists groups and members of the Board of Supervisors are still pressuring SFERS to support the proposal.

Ahead of the vote, Divestment Facts is debunking some of the most erroneous claims being made at public hearings and in newspaper op-eds by proponents of divestment. When considering the facts, it’s clear that pensioners who rely on this fund have nothing to gain, but lots to lose, if the Retirement Board moves forward with divestment.

Myth: “I find it questionable that divestment would cause a loss because it’s not just fossil fuel, we have a vast energy sector that provides diversification.” (source)

Fact: Broad divestment, like that which SFERS is currently considering, would result in huge losses to pension fund returns.

According to a widely-published report by Prof. Daniel Fischel of the University of Chicago Law School, SFERS could lose up to $201 billion over 50 years if it fully divests. Additionally, given the high percentage of SFERS’ fossil fuel investments in indirect holdings, divestment would also impose expansive new transaction fees, management fees, and compliance costs. These mounting costs are in addition to the losses associated with higher risk.

The SFERS’ staff came to the same conclusion about the costs associated with divestment, noting the following:

“…Divestment from Carbon Underground 200 fossil fuel companies will materially reduce the potential risk-adjusted return from the SFERS public markets portfolio. Further, Retirement staff believes that attempting complete divestment from these holdings within a 180-day period would exacerbate the potential losses associated with divestment.” (emphasis added)

Myth: “Divestment is a powerful way for our cities, states and public institutions to cut ties with this industry, take away their social license to operate and weaken their political power.” (source)

Fact: Experts throughout California oppose divestment, noting that it is ineffective and costly.

UCLA professor Ivo Welch directly addressed the main argument for divestment – that it would hurt energy companies financially – in a New York Times Op-Ed. Referencing Stanford’s failed attempt to divest, he wrote “Individual divestments, either as economic or symbolic pressure, have never succeeded in getting companies or countries to change… It would not lead the executives of the affected companies to engage in soul-searching, much less in changes in operations.”

Frank Wolak, director of the Program on Energy and Sustainable Development at Stanford, noted “Divestment comes at the expense of meaningful action… It will do nothing to reduce global greenhouse emissions. It will not prevent these companies from raising capital.”

Last April, CalPERS also unanimously voted to drastically curtail its divestment policy. Reiterating its opposition to divestment, CalPERS recently tweeted, “We have a fiduciary duty to our members & their beneficiaries. Not only does #divestment impact our profits, it also limits our available investment options, increases risk in our portfolio, & takes away our voice.”

Myth: “Climate change is the pending moral and social issue of our time. And while short-term returns may feel good in a diversified investment portfolio, when we have a $5 billion liability to adapt to sea level rise, we may not be thinking about long-term fiduciary duty that the $16 billion fund ultimately has.” (source)

Fact: Divestment has no impact on the environment or climate.

While considering climate-related risks is noble, it is not, in fact, at the discretion of pension fund trustees to make such decisions. According to the Internal Revenue Service, “For retirement plans, the law defines the actions that result in fiduciary duties and the extent of those duties.” That’s right, pension plans are mandated by law to uphold its fiduciary duty and act in the best interest of the fund.

Even if the Retirement Board felt they had a moral obligation to consider climate risks, the truth is that divesting from fossil fuels does not impact a company’s bottom-line, and therefore does nothing to address climate change. In fact, in a recent memo, SFERS staff and NEPC, SFERS’ independent investment consultant, both agreed that “SFERS’ divestment from fossil fuel holdings will not reduce carbon emissions– it simply changes ownership of these securities. With divestment, SFERS will forfeit its standing as a shareholder to engage these fossil fuel companies to transition their business plans to a low carbon economy in line with the Paris Agreement.” (emphasis added)

Why put pensioners’ retirement funds at risk for an empty gesture that has no impact on the environment?

Myth: “We heard that they [SFERS] would be the only pension fund to divest. This is boldly false. Washington D.C.’s pension fund divested in June 2016.” (source)

Fact: This is an extreme overreach, as countless cities, schools, and pensions across the nation have rejected costly divestment.

While the Washington D.C. pension fund technicallydivested from its direct investments of 200 fossil fuel companies, direct holdings are only a small fraction of its portfolio; other asset structures include mutual funds, commingled funds, and private equity – many of which actively invest in fossil fuels. And, you guessed it, the District did not divest from these other types of assets, making its divestment announcement largely symbolic as a means of appeasing the small faction of people who were advocating for it while the pension fund continues to benefit from investments in fossil fuels. In reality, many blue cities and states across the country, including Seattle and Vermont, have rejected divestment proposals.

SFERS staff in its recommendation against divestment even noted that “not a single public plan has actually divested; no investment consultant to a U.S. public pension plan has recommended divestment.”

And while New York Mayor de Blasio recently announced plans to divest the city’s funds from fossil fuels, it’s far from certain that it will actually happen. According to the announcement, two of the city’s five pension funds will “begin the process” of examining how to divest by 2022 and the other three will be “encouraged” to begin divestment. Furthermore, the city Comptroller’s office has stated that divestment will only happen if it is found to be in line with their fiduciary duty, and studies have shown that divestment will be just as costly for New York City as it will be for San Francisco. Given that a recent American Council for Capital Formation report puts NYC’s public pension funds at $56 billion in the red today, with “four out of every five taxpayer-dollars collected by New York City’s personal income tax spent paying down the city’s public pension fund system’s liabilities,” divestment sounds like the last thing New Yorkers need.

Bottom Line: Divestment is a costly, empty gesture that costs pensioners and does nothing for the environment. SFERS should say no once and for all to this flawed investment proposal.

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